Terminating a commercial contract by estoppel

The usual contractual methods for terminating a lease, or strictly, the ending of the tenant’s obligations under a lease, whether by the fixed term coming to an end, the operation of a break clause, by agreed surrender or assignment are relatively clear and well understood.  However, the courts can, under the doctrine of “equity”, interfere in cases where the assertion of strict legal rights is found to be unconscionable.  Helen Porter, Property Litigation solicitor, comments on a recent Court of Appeal decision in which she successfully argued on behalf of her landlord client that the tenant’s lease from her client had not been ended through estoppel by conduct, or alternatively estoppel by convention.

Essentially, this kind of equitable right for a tenant will arise where:

• The landlord induces, encourages or allows its tenant to believe that the tenant has or will have some right or benefit over the property (‘assurance’);
• The tenant relies on this belief and in doing so acts to its detriment to the knowledge of the landlord (‘detrimental reliance’); and
• The landlord then tries to take unconscionable advantage of the tenant by denying the tenant the right or benefit that the tenant expected to have (‘taking unconscionable advantage’).

The same can apply to other business contracts, not just leases.  In legal language, a party who is unable to rely on his legal rights because of this kind of behaviour is “estopped” from relying on the strict legal position.

In such circumstances, the tenant can apply to the court for relief from the landlord’s legal or contractual rights in equity.  The onus on the landlord will be to show that there was no reliance; by proving, for example, that the tenant would have acted in that particular way regardless of the assurance, or was motivated by some other factor.

In this case (Lankester & Son Ltd v Rennie & Rennie [December 2014]), the Court of Appeal held that the tenants remained liable for the continued performance of the covenants under their commercial lease with our client.

The facts were that the landlord had granted a lease for 10 years from May 2007.  The tenants covenanted to pay the rent and not to assign the benefit of the lease without the landlord’s consent.  The lease contained a break clause in the tenants’ favour, personal only to them and conditional upon payment of monies due under the lease.

In October 2008, the tenants discussed with the landlord the possibility of their either surrendering the lease or assigning it to a third party company.  The landlord indicated that it would only consent to an assignment if the company’s directors personally guaranteed that they would comply with its obligations under the covenants in the lease.  No such guarantees were forthcoming.  In addition, the company wanted the benefit of the break clause but nothing was agreed.

The tenants vacated the premises in November 2008, allowing the company to enter and take up occupation without a formal assignment or the agreement of the landlord.  A solicitor acting for both the tenants and the company held a signed but not dated deed of assignment.  The company made payments due under the lease to the landlord.

In February 2010, the company vacated the premises.  The landlord asserted in correspondence that the lease had not been assigned and that the tenants remained liable under the covenants for the remainder of the term of the lease.  Proceedings were subsequently issued and the tenants defended on the basis that they had assigned the lease in equity, that the landlord was estopped from contending that the company was not its tenant and that the estoppel prevented the landlord from asserting its claim against them — in simple terms that because the landlord had accepted payments from the company as “rents”, it could not argue that the “previous tenants” were still liable.  The court disagreed so the tenants appealed.

The Court of Appeal upheld the original trial decision.  The tenants could not rely on any perceived rights between the landlord and the company which might have arisen from the acceptance of rent, but only on the position as between the landlord and the tenants.  The tenants had not demonstrated any detrimental reliance.  The deed of assignment held by the tenants’ solicitor had to be “delivered” to become effective (ie there had to be something more than the solicitor simply holding an undated but signed document).  The landlord had also insisted upon personal guarantees and the company’s requirement that it should have the benefit of the break clause remained outstanding.  There was therefore no agreement by the landlord to the assignment.

This case provides useful clarification on when property or contractual rights may be affected or created by the doctrine of propriety estopped.  An estoppel by representation must be personal to the parties.  The court will be primarily concerned with the relationship between the landlord and its tenant.  Here, it could not find that the landlord had represented to the tenants that it had accepted the company as the assignee of the lease.  Moreover, the court found that the tenants had not acted to their detriment in reliance on the landlord’s alleged representation.  The monies due under the lease had been paid and the right to terminate under the break clause had not been lost by the tenants until well after the company vacated.  Nor was there any estoppel by convention.  There had been no shared understanding (that an assignment had taken place) as asserted by the tenants.  The tenants accordingly remained liable for their obligations under the lease.

For assistance with commercial litigation, you can contact Helen or a member of the team on 023 8071 7717.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.